The year 2008 showed us the worst face of capitalism and made several people rethink their investment strategies. The stock market fluctuations were bad enough to actually shake some of the most fundamentals financial lessons we have learned. Blinded by our greed (or by our naivety!), we though, once again, bad things could only happen to others; that our economic system was stupid proof. Well, we actually proved that it was stupid 😉 Based on what recently happened on the stock market, I decided to revisit some fundamental investing rules.
Stocks always go up
Before 2008, most people agreed that if you buy stocks and hold them long enough, you are able to make a decent profit. Or at the very least, get back your initial investment ;-). While I still believe that stock markets always go up over the long term, there is a problem with this investing rule: defining what is a long term investment horizon.
Most projections are made for investment over 5 to 10 years when we talk about investment yield or investment expected return. The sad truth is that someone who would have invested $1,000in the S&P 500 in 1999, would be left with the devil in his pocket ($666 so -33%)). I let you imagine if he would have decided to invest in the NASDAQ ;-).
On the opposite side, investing in bonds for the past 10 years would have given a positive return.
The theory still stands
If you consider an investing horizon of more than 25 years, all graphics will show a better return for stocks than bonds or any other investment products (rental properties, GIC’s, etc.). However, you must be able to stay in the market for at least 25 years! If you are 30, this is not a problem, but if you are 55, you might think about it twice.
It also all depends on the timing. As you may conclude, you can make say anything to numbers. If you wait 2 years and you take the numbers from the S&P 500 from 2001 to 2011, I’m pretty sure you will show very positive results. The proof is that the S&P 500 shows a positive annualized return of about 7% on the past 15 years (this brings us back before the techno bubble).
Stocks always go up: revisited:
The key is to define long term investment for more than 10 years. Therefore, you age and the age you want to retire will play a determinant rule in regards to investing in the stock markets. As you age, you should slow down on stocks and buy other investment alternatives such as bonds, linked notes, GIC’s or rental properties (is you wish to manage renters 😉 ).
However, if you invest in the stock market today, consider long term as being 15 – 20 years to make sure you don’t lose your money. I have seen too many people thinking they could make good returns within the next 5 years and crying a few years later.
One last point; I would not give too much importance to past returns showed by mutual funds. Looking behind won’t give you much information about what is coming up on the stock markets. Investing rules are changing since last year and it will never be the same…
For more information on stocks, you can look at free video at INO TV. They offer great videos answering all kind of questions about trading.
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